Economists on Greece
June 18, 2012
Ahead of the second Greek parliamentary elections in the space of a mere six weeks, a number of worst-case scenarios were floating about: Alexis Tsipras from the radical left becomes prime minister, he stops all austerity programs, the flow of funds for Athens is cut off, Greece leaves the currency union, other countries follow; the eurozone falls apart.
But now the Europe-friendly conservative New Democracy has won the elections. The result is reason for some cautious optimism, said Wolfgang Franz, president of the Centre for European Economic Research (ZEW) in Mannheim, a German economic leader. But he adds that Greece still has a long way to go to secure its position in the eurozone for good. “It all depends on whether or not Greece gets a functioning government. That's not going to be easy.”
Tricky situation in Greece
New Democracy wants to form a coalition with the socialist Pasok party because both support the reform path in principle. Pasok wants to get the left coalition Syriza on board to avoid being confronted with mass protests on a regular basis. But Syriza as a coalition member would mean that the new government would have a tough time negotiating with international donors.
The "Men in Black" as the troika experts from EU Commission, European Central Bank and the International Monetary Fund (IMF) are called, will pay their next visit to Athens as soon as a functioning government has been found. They are expected to say that the situation of ailing patient Greece has only got worse. Tax revenue went down by a fourth in May compared to the same month last year - because of the political paralysis. The economy has shrunk by a fifth since the crisis began. That's why it's an illusion to think that Greece can reduce its budget deficit to below three percent of gross domestic product by 2014.
Concessions to Greeks could concern schedule
Wolfgang Franz agreed with German foreign minister Guido Westerwelle who said that stretching the consolidation goals could be an option. But first Greece has to deliver, Franz added. “Goods markets and labour markets have to become more flexible to reduce barriers that hinder access to certain professions,” Franz told DW. Another option would be to introduce a tax system where higher incomes would also pick up the tap. “That doesn't cost a lot of money, and you can implement it straight away.”
But neither side has much time. Greece's coffers will be empty as early as mid-July. One month later, Athens has to refinance a big sum of state bonds. If no agreement can be found, Greece is bankrupt.
Exit as the only cure?
While it's a scenario that many politicians avoid mentioning at all costs, many economists believe it's only a question of time before Greece leaves the currency union. Hans-Werner Sinn, the President of the Munich-based ifo institute, even goes as far as saying only an exit from the eurozone can help the Greeks get back on their feet, because it would mean a massive devaluation of the old and new drachma. “This would have several effects. One, the tourists would come back. Two, the Greeks would stop importing more agricultural products from France than they export. That would revive the local economy. And three, the flight capital would come back”, Hans-Werner Sinn told DW. At the moment, the bailout programs are keeping prices for real estate and other assets at an artificially high level which is not stable, he added.
ZEW President Wolfgang Franz is worried about possible implications that a Greek exit could have on the rest of the eurozone. “It's virtually impossible to calculate the costs of a Greek exit and compare them with costs that would occur if more bailout money flows so that Greece can stay in the currency union.” Franz favors the option of keeping Greece in the eurozone because he fears contagion of other ailing states.
Contagion has already happened
But Ulrich Kater, Chief economist of Deka-Bank, warns that contagion has already happened. "What's looming now is that refinancing Spain and Italy is getting more and more expensive and is drying up quantitatively.”
Spain had to pay more than seven percent of interest on 10-year bonds on Monday - a historic high since the euro was introduced. Ulrich Kater believes the eurozone would have to undergo its real test if it had to bail out Spain and Italy. When talking about the survival of the euro, Greece no longer played a role, “because for the last two or three years the markets have already assumed that Greece has difficulties to stay in the euro”, Kater told DW.
Author: Zhang Danhong / nh
Editor: Nicole Goebel